Talk:Regulatory harmonization

From Riski

Jump to: navigation, search

Jurisdictional resolution

The agencies have faced the sometimes difficult question of which agency has jurisdiction over a particular product. Some financial products have attributes that make it difficult to determine which agency has jurisdiction over them. This uncertainty at times has caused lengthy delays in bringing new products to market. The lack of legal certainty can be costly and confusing, and it can impede innovation and competition. Public feedback on these subjects suggested the following:

  • A method of reaching prompt resolution of jurisdictional disputes is needed.
  • A mechanism should be developed to break deadlocks between the CFTC and the SEC over disagreements regarding jurisdiction over products.
  • Self-certification procedures should have a meaningful burden for exchanges to demonstrate that a proposed product listing will comply with applicable law.
  • Regulatory agencies must have the authority to choose to review contracts or products prior to listing and be able, in some instances, to disapprove of listings.

Rulemaking approaches

Review and Approval of Rules. There are some basic differences in the regimes under which the CFTC and SEC approve and review rule changes and amendments for exchanges, clearinghouses, and other self-regulatory organizations (“SROs”).

Under the CEA’s principles-based approach to oversight, applicable to exchanges and clearinghouses as established by the CFMA, in most cases, rule filings are made under self-certification procedures.

Under a principles-based approach, an exchange or clearinghouse has significant discretion in the manner in which it satisfies the statutory core principles, which are less susceptible to change, given that they may only be modified by Congress. To take formal action to disapprove a self-certified rule, the CFTC must determine that a rule violates the CEA. Thus, under the principles-based approach of the CEA, the CFTC’s ability to regulate exchange and clearinghouse rules is limited.

Under the Securities Exchange Act, although exchanges must submit proposed rule changes to the agency, about two-thirds of proposed rule changes are effective immediately upon filing. The remaining rule changes, however, must be approved by the SEC before they are effective. All proposed rule changes are published for comment. This process allows an opportunity for the market participants, including brokers, dealers, and investors, to comment on changes to exchange and SRO rules.

  • Panelists and comments have stated that the agencies’ oversight of exchange and clearinghouse rules should balance the opportunity to comment with the speed provided by self-certification. Some exchanges and clearinghouses state that self-certification enables them to implement business decisions promptly. However, other exchanges and their constituents note that a prior approval process, including one that involves a comment procedure, is important because it creates legal certainty and permits regulators to exercise oversight with proper information, which is derived in part from public input on significant issues during the comment process. Other panelists encouraged looking at ways to expedite the rule approval process.
  • The CFTC standard of review for rule filings, which forbids the agency from disapproving a rule unless it finds that it “would violate” the CEA, does not afford the agency sufficient authority to ensure exchange and clearinghouse compliance with the CEA, adopt to market conditions and international standards, and protect the public..
  • The SEC review process for rule filings was recently modified to create set time periods for action to be taken.

Segregation and Insolvency.

Both regimes have “segregation” rules that aim to protect customers from inappropriate use of customer funds by futures commission merchants (“FCMs”) and broker-dealers (“BDs”).

CFTC and SEC statutory and regulatory provisions, however, contain significant differences in the specific manner in which assets are to be segregated.

Under the CEA, FCMs may not commingle customer funds either with their own accounts or the accounts of customers.

Generally, a BD may not commingle its securities with those of customers or pledge its customers’ securities in an amount greater than what the customer owes. If a customer has an outstanding margin loan, the BD may use a limited amount of the customer’s securities for financing. There is no parallel financing practice in the futures markets because futures margin is a performance bond and does not involve an extension of credit.

The regimes governing bankruptcy and insolvency are also different. For example, in the case of a BD insolvency, there is $500,000 per customer protection under the Securities Investor Protection Act (“SIPA”).

By contrast, the Bankruptcy Code and CFTC regulations, by virtue of the governing segregation rules, contemplate portability of positions and funds, whereby customers may rapidly transfer their accounts from an insolvent FCM to a financially healthy FCM.

SEC regulations also contemplate expeditious transfer of customer accounts through self-liquidation or a proceeding under SIPA. In general, if the books and records of the broker-dealer are in order and customer accounts are properly margined, customer accounts may be transferred to another broker dealer in a process known as bulk transfer. There is no insurance coverage for customer positions and funds that are held in a segregated futures account. (page 4)

Retrieved from "http://www.freerisk.org/wiki/index.php/Talk:Regulatory_harmonization"
Personal tools